Saving for education

2011-05-14 09:17

When starting a savings plan for your children’s education, you need to be realistic about what your goals are. It would be very difficult to save enough money during your child’s first seven years to completely pay for their 12 years of school fees (see table).

What your education savings need to achieve is to fill the gap between school fee increases and your salary, and to pay for those extras such as books and school tours.

It is likely that school fees will increase by more than your salary each year. Education costs have risen by between 9% and 10% each year, but salary increases have not matched this figure.

Your first goal is to save so that you can make up this difference without education taking a bigger bite out of your household finances each year.

Your second goal is to fill the gap between high school and primary school fees, as you will be paying about 20% more once your child starts high school. In fact, even primary school fees often increase with each grade, over and
above the normal yearly fee increases. A Grade 1’s school fees tend to be lower than a Grade 5’s, for example. So not only are you facing fee increases of 10%, but you have fee escalations as your child moves into higher grades. Your aim is to save to meet those increases.

If your child has not yet started school, calculate how much you will be paying for his or her school fees each month and start saving that now. You will get used to living on a budget that includes school fees while building up savings.

If your child has started school, immediately increase your savings by the difference between primary and high school fees. In this way, you will be setting aside a realistic percentage of your salary for your child’s 12 years of school education and the savings will supplement the yearl fee increases in high school.

Consider policies
Many people invest for their children’s education through education policies sold through life companies like Sanlam, Liberty, Metropolitan and Old Mutual.

These are structured as endowment policies and you have to invest for a set period of time.

Benefits of a policy
1 Discipline: An education policy structured as an endowment is a good option for the undisciplined saver because it commits you to making contributions for a set period of time (usually five years) and you cannot access the capital before that time.

2 Insurance: In most cases, the insurer will continue to cover your premiums if you die or become disabled so your child’s education fund is not affected. Check whether your policy includes this benefit.

3 Minimum contributions: Education policies usually have lower minimum contributions than unit trusts. You can take out a policy for R150 a month.

4 Tax: Endowments are sold as “tax-free” savings because all tax on capital and interest is paid by the fund at a rate of 30% and not in the hand of the individual. However, this becomes a disadvantage if your tax rate is lower than 30% because you would pay less tax if the investment was taxed in your hands.

Disadvantages of a policy
1 Costs: Underlying costs and commissions on an endowment are higher, and this affects your final return. Somerset Morkel, a wealth manager at Alexander Forbes, says if a product offers “no initial fees”, these will be recovered by the insurer from the yearly returns.

2 Inflexibility: If you can’t pay your instalment for a few months or need to draw down on your investment, you will pay a potentially heavy penalty. Some policies do offer a premium holiday for a few months if you cannot meet your payments due to financial difficulties, so make sure you ask about this first. Remember this only applies to financial difficulty and it is not a permanent waiver of your commitment to meet those contributions.

3 Tax: If you are earning less than R235 000, it would be more beneficial from a tax perspective to invest in a unit trust. Morkel points out that interest income in your own hands up to R22 800 a year (under 65) and R33 000 a year (over 65) is tax-free so you will probably not pay that much tax anyway.

Fundisa for tertiary education
Fundisa is an excellent way to save for your child’s tertiary education.
It’s a low-risk, fixed-interest income unit trust fund jointly offered by the education department and the unit trust industry.

The minimum monthly investment is R40 and government tops up your contribution by 25% a year up to a maximum of R600 a year.

The yearly fee is not more than 1.25%, which is deducted from the return earned on money invested.

You won’t pay an upfront fee if you invest directly with Standard Bank, Nedgroup Investments or Absa and their agents. However, if you invest through a broker, they are entitled to charge a 3% fee upfront.

Anyone can invest for any child, so this can be the perfect gift from a grandparent, or you can sponsor another child.

The money can only be used for tertiary education, but if your child decides not to study, it can be transferred to another child.

When the learner is about to study at an institution, the unit trust company will issue a certificate. The learner takes this certificate to the institution, which then receives payment from the National Student Financial Aid Scheme on presentation of the certificate.

You can still withdraw the money and not use it for education purposes, but then you will not receive the bonus 25% from government.

Your access bond: risk-free for the disciplined saver.

Morkel also suggests that you consider investing additional money, by monthly stop order or in ad hoc payments into your access bond each month.

This gives you a guaranteed, zero-cost investment where the returns are totally untaxed and are not subject to market volatility.

The one disadvantage, again for the undisciplined saver, is that you could be tempted to dip into the bond for whatever you may need.

If you neglect to replace the money you withdraw, the end goal will be compromised.

Unit trusts for flexibility and transparent costs
You are always able to see what you are paying when you invest in a unit trust.

The cheapest option is to invest directly with investment houses such as Allan Gray, Investec, Old Mutual or Coronation as they do not charge upfront fees for direct investments.

If you have a five-year investment horizon, it is best to select a balanced fund that has a mixture of cash, bonds and equities.

For a 10-year investment period, you should look at an equity fund.

Also consider an exchange-traded fund such as Satrix RAFI or Satrix 40 for low-cost options.

If you are saving R500 or more a month, then the Old Mutual RAFI fund is the cheapest option.

The minimum monthly contribution for a unit trust is in the region of R300 a month.

However, unit trusts offered by your bank usually have lower minimum contributions, starting at about R40 a month in some cases, but the fees as a percentage are higher due to administration costs.

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